Suits fight new rate setting tied to driver’s record, not ZIP code.
The California Farm Bureau Federation and three insurance trade groups mounted a legal challenge Thursday to rules that change how auto insurance rates are determined statewide, just days after the regulations won approval.
In two separate lawsuits, the organizations accuse Insurance Commissioner John Garamendi of overstepping his authority by enacting regulations that require carriers to set auto rates for the state’s 23 million drivers based primarily on their safety record instead of where they live.
“Under the new regulations, drivers in Beverly Hills are going to see substantial reductions in their auto rates,” said Carl Borden, an attorney for the Farm Bureau. “But that will be at the expense of drivers in rural and suburban areas, which will be seeing rate increases.”
The issue centers on Proposition 103, the landmark auto insurance measure passed by voters in 1988 that requires carriers to use the driver’s record, miles driven and experience in determining rates. The law allowed the state to establish other rate-setting factors such as ZIP codes.
After a long legal fight, an appellate court ruled in 2000 that insurers could put greater weight on ZIP codes in determining rates because losses are often higher in some neighborhoods than in others.
Opponents have built their legal challenge on the appeals court ruling. Garamendi, too, cites the case for empowering him to rewrite rules when the rates are out of kilter.
“I have the authority and power to write the regulations,” Garamendi said Thursday. “This is the last dying gasp of an industry that has fought for 18 years to overthrow the will of the voters when they approved Proposition 103.”
Garamendi has called the current process unfair and irrational and unveiled the new rules in December.
“The voters made it very clear that auto insurance rates should be based on how you drive, not where you live,” said Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights in Santa Monica.
Consumer groups and major cities such as San Francisco and Los Angeles pushed for the changes, arguing good drivers should be rewarded with lower insurance premiums.
Earlier this year, a Consumers Union study reported auto insurers charged higher rates for drivers living in largely African American or Latino areas compared with white neighborhoods.
Heller pointed out one major carrier, the Automobile Club of Southern California, agreed last week to follow the new process and announced rate cuts averaging 7 percent, or $134 a year. About 88 percent of its 999,000 policyholders will receive decreases.
The Farm Bureau filed its suit in Sacramento Superior Court on Tuesday. A day later, the Personal Insurance Federation of California, Association of California Insurance Companies and the American Insurance Association sued Garamendi in the same court.
Insurers cite an industry study that predicted more than 60 percent of drivers would pay more for auto insurance. Rates would rise in 52 of the state’s 58 counties.
The Farm Bureau projects rural residents in the Colusa County town of Maxwell, for example, could see a 21 percent rate increase. Drivers living in Hat Creek, Shasta County, could receive a 20 percent hike.
“We don’t want to charge our customers more than they should pay,” said Sam Sorich, president of the Association of California Insurance Companies.
“I’m disappointed the (insurance) department failed to recognize the sound legal analysis that we put forward,” Sorich said. “The issue is now where it should be — before a judge to make a ruling whether or not these regulations comply with the law.”